Using Blockchain for the Securities Industry – Part 2

Using Blockchain for the Securities Industry – Part 2

By beachbummer | ProBeach | 5 Mar 2020


In Part 1, I described the characteristics of the Custodian and the Client within the blockchain model. In Part 2 here, I will describe some of the vital pieces left in the model: namely token transfer and ICO/ITO. 

Click here to read Part 1

Token Transfer 

Moving on from the clients, blockchain accessibility will be a different matter for all the Custodians participating in the blockchain. Whether it is a public or private blockchain, the Custodians must all have access to the blockchain in order to perform transactions. A Custodian will have the capability to transfer tokens from wallets under their charge to another wallet. This destination wallet may belong to them or to another Custodian. 

Transferring tokens between wallets is nothing new to those who are familiar with cryptocurrencies, but it may prove to be an expensive challenge for Custodians who are new to cryptocurrencies and blockchains. Under the existing Custodian and share transfer processes, it is possible to reverse transactions and transfers if an error was made. It is probably very difficult to make share scrips disappear into thin air. Let's say you somehow tried to send scrips to a Custodian specifying a non-existent account number, the Custodian will probably contact you to clarify things. However, if you were to specify a wrong but valid address on the blockchain while sending tokens, you may lose those tokens forever – the proper term to describe this is a "token burn" -- especially if the address does not belong to anyone. Probably you can attempt to send a miniscule token (also known as "dust") to the address along with an embedded message to request for the tokens to be returned to your wallet address. 

 

The Securitised ICO/ITO 

With this framework, we can now summarily trace the lifecycle from IPO/ITO (Initial Public Offering / Initial Token Offering) to full market participation with a sample scenario. XYZCorp wishes to go public with an ITO and approaches a bank, let's call it ITOBank, to be the ITO lead manager. Using ERC20 tokens, ITOBank creates XYZCORP token that has a total supply of 100 million tokens and assigns all these 100M tokens to the ITOBank Custodian Ethereum wallet. Other Custodians throughout the world will then bid and indicate their interest to participate in the ITO, possibly through the use of Ethereum smart contracts. XYZCORP tokens will then be sent to all the Custodian wallets that have successfully obtained ITO tokens. Once trading is opened on a Token Exchange, the tokens will be transferred around the different Custodian wallets according to the trades done on the exchange. Part of the commission earned by the token exchange will have to go to the Custodians for maintaining the wallets and also to the Ethereum miners/stakers who are processing the information to be updated to the blockchain. There is a possible variation on this model where the mining/staking fee is reduced if the Token Exchange or Custodian is able to do internal crossings – this is actually what many of the existing Centralised Cryptocurrency Exchanges do. 

  

Concluding Part To Come... 


beachbummer
beachbummer

Professional in Financial Services


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